Cost calculation

Table of contents :

  • Order-based Cost Calculation System
  • Direct Raw Material Costs
  • Direct labor costs
    • 1). Working hours :
    • 2). Idle Time:
    • 3). Treatment:
    • 4). Incentives:
    • 5). Overtime Premium:
  • Overhead Costs
    • 1). Preparing budget
    • 2). Determine the Basis of Loading on the product with due regard
    • 3) Calculating Rates
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Order-based Cost Calculation System

When calculating production costs, there are two calculation systems, namely the job order costing system and also the process costing system.

The purpose of the two cost calculation systems is to select the cost of the goods or services produced by a company.

The cost calculation system used should be economical in operation.

At the time of the order-based cost calculation system (job order costing or job costing), production costs are accumulated for all separate orders (jobs).

An order is an identifiable output to fulfill a specific customer order or to replenish an inventory item.

In order for the breakdown of order-based cost calculations to match the effort required, there must be an important difference in the per-unit cost of one order with another.

For example , if a printer is simultaneously preparing orders for labels, colored wrapping paper, and sticky images,

Therefore, the orders can be easily grouped based on their physical appearance, the cost per unit of these orders is also different, and the cost calculation based on the order is used.

Details of an order are recorded on a job cost sheet, both paper and electronic.

In addition to that many orders can be executed simultaneously, each order charge card combines the details for a particular order.


Also Read:   Cost Calculations and Accumulated Costs


These details include direct raw material costs, direct labor and overheads that are charged to each order.

Direct Raw Material Costs

Starting from an order, when the production department / factory in charge of executing the order,

will definitely make a plan in advance, namely the production plan which includes: the raw materials required with a Purchase Requisition.

This purchase request letter serves as a purchase guide for executing orders or it can be used as a basis for sending a Purchase Order.

When the purchasing officer arrives the order will conduct an inspection, whether the amount is in accordance with the order made, after which it is approved.

The purchase section shows the Receiving Report which contains the number of conditions of the goods received.

This receipt is recorded by debiting the Raw Material (Material) estimate or vice versa for the Account Payable estimate (cash is recorded next to the credit).

The production department starts its activities by making a Material Requisition Bill.

Overview of expenditure receipts that periodically is an evidence to move raw material costs directly from estimates of raw material control to estimates of control of Goods in Process (Work in Process).

The costs transferred are direct raw material costs that are charged for all orders.

Direct labor costs

Direct labor costs are intangible costs, unlike the use of raw materials, this system must be carried out carefully regarding the treatment of direct labor costs.

In order to determine the exact amount of TKL wages that must be paid to workers (laborers) during the salary payment period

as well as the appropriate assignment of labor costs to the Fabricase Cost estimates as well as to individual orders.


Also Read:   Definition of Problem Financing


Labor-related costs:

1). Working hours :

Costs incurred to start production activities are to include the element of overhead costs and charge the order concerned.

2). Idle Time:

Time when as a result of machine failure, shortage of work or mismanagement etc. Employees are not working.

The situation remains the responsibility of management, therefore he still has to pay employees salaries.

3). Treatment:

Treated as an element of Factory Overhead Costs

4). Incentives:

giving awards in the form of a wage salary as an effort to provide work motivation or rewards for good performance.

5). Overtime Premium:

payment of wages to employees because they work more than the specified standard (above 40 hours per week).

Overhead Costs

Factory overhead costs are indirect material costs, indirect labor and other factory costs that are not immediately identified or charged directly to a job, the result of production / final cost objectives (Usry & Hammer, 1991–368).

Other expert opinions suggest that factory overhead costs are any costs that are not directly attached to a product,

that is, all costs excluding direct material costs and also direct labor costs. Factory overhead costs include other production costs,

for example, such as heating the factory space, lighting, factory shrinkage and machinery.

Steps to Determine Factory Overhead Cost rates

1). Preparing budget

2). Determine the Basis of Loading on the product with due regard

First, determine the dominant amount of BOP. after that, learn the properties of BOP and also the close relationship between these properties. on the basis of the loading used.

The basic types of selection are product units, raw material costs, labor costs and direct labor hours and machine hours.


Also Read:   The Role of the Budget


3) Calculating Rates

After the capacity level to be realized in the budget period is determined and the factory overhead budget has been prepared

then the basic loading has been selected and has also been estimated, then the final step is to calculate the factory overhead cost with the formula:

The BOP that has been budgeted is the factory overhead cost and the estimated basic charges

Order-based cost calculations in manufacturing companies are used to trace several costs directly to each segment of output.

This situation can occur when customers order or other segments of output are not all the same.

Each identified segment of output is called an order. Details of order fees are collected on the order cost card, which also serves as a subsidiary book for the Work in Process account.


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